Minimum wage hikes do close restaurants

Washington - An increase in the minimum wage does cause
restaurants to close, a new study suggests. But only a certain kind of
restaurant: the ones that patrons already liked less.

The study, a working paper by Dara Lee Luca at Mathematica
Policy Research and Michael Luca at the Harvard Business School, analyzed
almost 10 years of Yelp rating and closure data from more than 30,000 San
Francisco Bay area restaurants.

By comparing closure rates to user ratings and the timing of
the region's multiple minimum wage increases, the Lucas, who are married, were
able to determine how the hikes impacted a restaurant's chances of closing.

Those chances varied widely by the restaurant's popularity,
concludes the study, which was sponsored by Yelp. Among 3.5-star restaurants,
every $1 increase in the minimum wage increases the restaurant's chances of
closing by 14 percent. But five-star restaurants don't experience that same
effect.

"You are losing something from the market,"
Michael Luca acknowledged. "But what you're losing is the lower-quality
businesses."

Debate over minimum wage

The Lucas' results speak to a critical question in the
debate over minimum wage: Whom will higher wages hurt in the wider economy?
While this data doesn't address questions of jobs or unemployment, which many
other studies have done, it does suggest that the impact on business may be
less confined than some critics have expected.

Rather than handicapping successful businesses, higher wages
appear to shorten the time before unsuccessful businesses close. And because
there's a great deal of churn in the restaurant industry, new restaurants
frequently replace the old ones.

Luca has a few theories on why minimum wage hikes might
impact low-quality restaurants more than high-quality ones. For starters,
five-star restaurants generally have better service. (That's a component of the
Yelp score.) It makes more economic sense for a restaurant that values and
depends on good service to invest more heavily in its workforce.

Luca's data also suggests that five-star restaurants are
generally more profitable: that makes them less susceptible to market shocks
and more likely to stay open at any wage level. A three-star restaurant would
also be more vulnerable, Luca said, to something like sudden increases in rent.

"At any wage level, some businesses are doing well and
some aren't," Luca said. "If you're closest to the margin already,
then something like a minimum-wage increase is more likely to push you over the
edge."

Importantly, Luca's study did not look at the impact of wage
increases on employment - something he emphasizes. Because food service is a
high-churn industry, in which restaurants open and close and employees move
around all the time, the fact that one restaurant closes does not necessarily
mean more people will be unemployed.

There is also little correlation between a restaurant's Yelp
rating and its price, Luca cautioned. While it may be tempting to come away
from his results with the impression that low-end restaurants - and employees -
face more risk, that is not consistent with the data, Luca said.

In his sample, the average restaurant had tenure of almost
six years, a rating of 3.6 stars, and a price indicator of 1.6 "dollar
signs" - Yelp-speak for roughly $22 per head.

According to Yelp, nearly half of all the restaurants on its
platform have five stars. Roughly one-third have three stars or less.

"If anything, the study shows that a higher minimum
wage might make the market more competitive and reduce the number of poor
performers," concluded Paul Sonn, the general counsel and program director
at the National Employment Law Project. "Some firms are better at
adjusting to competitive pressure than others."

Whether the restaurant industry needs more competitive
pressure is, of course, a matter of debate. Running a restaurant is already a
delicate business, with more than half of all restaurants shuttering in their
first year. And lately, the industry has faced added competition from delivery
services, supermarkets and convenience stores, which have all stepped up their
ready-made meal games.

February report from NPD Group

A February report from NPD Group, a market-research firm,
found that the number of US restaurants fell two percent in 2016, and that the
number of restaurants per capita is at its lowest in a decade.

That backdrop has made the debate on the minimum wage even
more fractious. The restaurant industry is the second-largest private-sector
employer in the country, according to the National Restaurant Association, and
it employs the largest share of minimum-wage workers of any business.

Advocates for a higher wage argue that a hike would reduce
poverty and inject billions of dollars into the economy, even if some
businesses have to adjust. Critics, on the other hand, have cited studies like
the Lucas' as evidence that a higher wage would result in even more restaurant
closures and, possibly, layoffs.

In a statement, Cicely Simpson, the executive vice president
of policy and government at the National Restaurant Association, described
minimum wage increases as a threat to jobs, small businesses "and the overall
economy."

"This study shows that government mandates price some
businesses out of the market," said Dan Mitchell, a senior fellow at the
Cato Institute, a libertarian think tank that opposes minimum wage increases.
"This is exactly what theory tells us."

Luca, for his part, warns against drawing any sweeping
conclusions from his work. He doesn't see it as a clear point for or against
the minimum wage - more like a clarification of something economists already
knew.

A wage hike has to hurt someone, somewhere: This helps nail
down who will be impacted. "Now we know what kind of trade-offs we're
dealing with," he said.